[ARFC] Adjust Risk Parameters for Aave V2 and V3 on Polygon

Governance
1

2024-12-18 Update for @ChaosLabs risk parameters and including third-party migration incentives.

Title: [ARFC] Adjust Risk Parameters for Aave V2 and V3 on Polygon

Author: @ACI

Date: 2024-12-13

Summary

This proposal seeks community feedback on adjusting risk parameters for Aave V2 and V3 instances on the Polygon network. The adjustments are in response to an upcoming proposal that will significantly impact the risk profiles of bridged assets within the Polygon network.

Motivation

Polygon governance is currently evaluating a proposal that would redefine the risk profile of bridged assets on the Polygon network. This change could have substantial implications for the risk profiles of Aave V2 and V3 deployments on Polygon PoS.

Historically, bridge vulnerabilities have caused the largest losses in the DeFi ecosystem, including:

  1. Ronin - $624M
  2. BNB “Bridge” - $586M
  3. Wormhole - $326M
  4. Nomad - $190M
  5. Multichain - $126M
  6. Harmony - $100M

The Aave ecosystem has experienced both indirect and direct impacts from bridge vulnerabilities, notably the Multichain and Harmony bridge hacks. Additionally, depositing user funds into unsafe protocols has historically resulted in significant losses. For example, the Angle Protocol deposited EURA funds into Euler a week before its hack, which caused EURA to lose its peg temporarily, impacting Aave users.

This ARFC aims to mitigate potential losses for Aave users by:

  1. Soliciting immediate feedback from risk service providers (@ChaosLabs and @LlamaRisk) to determine appropriate adjustments to risk parameters.
  2. Engaging @TokenLogic to design a user position migration initiative, leveraging Merit (rewards for closing positions on Polygon and reopening equivalent positions on other networks).
  3. Inviting L2 networks interested in attracting Aave Polygon users to participate in Merit co-incentive programs.

Sonic team announced a 20m$ incentives plan for their TEMP CHECK with 10% allocated for migration incentives.

  1. Seeking feedback from @bgdlabs to migrate Aave Governance V3 voting infrastructure to a more secure L2 network.
  2. Requesting support from @AaveLabs to develop front-end migration tools and provide Merit support for a seamless user experience.

Specification

The following recommendations are proposed to mitigate risk and incentivize migration from the Polygon network:

@ChaosLabs recommend the following risk parameters change:

Deployment Asset Current LTV Proposed LTV Current RF Proposed RF
Polygon V3 DAI 63% 0% 25% -
Polygon V3 USDC.e 75% 0% 50% 60%
Polygon V3 USDT 75% 0% 10% 25%
Polygon V3 USDC 75% 0% 10% 20%
Polygon V2 USDC.e 75% 0% 99.9% -
Polygon V2 DAI 63% 0% 99.9% -
  1. Remove support for Aave V3 Polygon in the Safety Module and cancel the umbrella deployment on Polygon.
  2. Migrate Aave Governance V3 voting infrastructure to another L2 network.

Next Steps

  1. Collect feedback from the community, service providers, and third-party L2 networks on this proposal.
  2. If consensus is reached, escalate the ARFC to the Snapshot stage for preliminary approval.
  3. If the Snapshot outcome is positive, escalate to the AIP stage for final community approval and execution.

Disclaimer

The ACI has not been compensated for creating this proposal.

Copyright

Copyright and related rights waived via CC0.

18 Likes
2

I agree with the risk adjustment and I think it’s a good move for the AAVE ecosystem, especially given Polygon’s proposal. While generating yield from bridge reserves could benefit their ecosystem, it also introduces new (big) risks that need to be carefully managed.

Being cautious with user funds is the right move here. In a world where chain abstraction is the goal, we need to make sure we keep users safe and properly informed about risks.

I fully support this move and hope other protocols will follow this example and be proactive.

11 Likes
3

After I was the PIP I was immediately thinking about the consequences for Aave user. I don’t have any problem with the execution itself, meaning no direct conflict with Morpho as probably most will say it’s because of them. The problem I see here is that user that used the bridge will be forced to farm yield with their assets. That one first red flag but the next thing is what is going to happen if funds get hacked/lost or simply a very bad mistake happens? This will lead to a huge de-pegging event and Aave user will be one of those harmed. The current revenue from this market doesn’t justify the huge risk we and again especially aave user would have to cover by staking their hard earned Aave nor is the treasury able to cover such a deficit. It is only responsible to take action and reduce risk as much as possible.

And for those reading this and saying “if it was aave instead of morpho it would be fine”. No it wouldn’t be fine and I would vote against it. We don’t have umbrella yet to cover such a huge amount.

So overall I am supportive and would like to see a technical solution for current active loans on Polygon to easily switch to another chain with sufficient liquidity so the overall migration would happen more or less in a single click. I could see the chance here for other chains to offer their help by incentivizing the migration to them.

13 Likes
4

A few considerations:

  1. it’s true that the aave protocol revenue coming from the polygon market is relatively low, but it does serve a very large userbase (last time i checked, it was one of the largest). There is no guarantee that these users will want to move to another network.
  2. It’s true that the risk profile of the network changes drastically, and Aave DAO has already incurred in bridge issues with (thankfully) much smaller markets, with repercussions still being addressed as of today.
  3. Aave has had long term, proficient relationship with the polygon network and i would like to see that continue.

I think the proposal is somewhat rushed and too harsh in its conclusions, but it’s also true that polygon approach in dealing with the matter hasnt been the most transparent, nor the most risk averse. Before deciding on whether or not the market should be deprecated, i would like to see polygon addressing the matter directly, hopefully here (since Aave represents 40% of the polygon POS TVL) and most importantly, adjusting the risk accordingly with an ad-hoc insurance fund that can meaningfully support the liquidity being rehypothecated (they talk about 1.3B reinvested so i would hope to see at least 2-300m as insurance fund), either from them directly or forcing the underlying protocol to do so. A risk analysis on our side is also a must of course.
Ultimately i am not a big fan of cutting bridges (no pun intended) neither i think that this adversarial, PvP attitude is the right strategy for the DAO moving forward, so before getting rid of a long term partner, i would like to see the matter addressed accordingly.

14 Likes
5

I don’t think and I don’t actually see this as a pvp battle. It’s seen from a risk perspective and I would definitely would wait for the outcome of the PIP. Depending on this, the Aave DAO has to decide. Polygon has been a longstanding partner from the beginning as the first L2/sidechain deployment.

And of course the DAO risk SP should make their assessments on the situation. I would be in favor of a gradual approach to match the r/r

6 Likes
6

Not normally one to engage on governance, however this one is unique, and this has quite a few overlapping touch points; 1. I was originally involved in the architecture of Multichain, while I stand by the Threshold ECDSA technology developed, it shows how easy the entire system could collapse because the original threshold key generation which was suppose to be distributed with shards destroyed, was in fact not, and ended up having probably the biggest backdoor imaginable. 2. The proposal on Polygon was co-authored by Yearn, a protocol I originally founded, and one that’s north star was always low risk sustainable yield (predominantly why the first $1bn in TVL yearn had, was also the first $1bn in TVL for Aave).

So that being said, there has been a long drive for “yield”, often bridges (and even some high profile L2s) have suggested using “yield assets” for their bridge. yUSDC (Yearn USDC) instead of USDC for example. Now in non technical terms, this makes sense, since why wouldn’t everyone want additional yield, in practice, this is really just leveraged yield (akin to fractional banking which was the antithesis of why the original defi ecosystem was created).

Now first a disclaimer, anyone can create a governance proposal on Polygon forum, this does not mean it would pass, and I do believe it is very unlikely to pass, if I am being honest, I am surprised it actually made it as far as it did, but probably the end of the road for that proposal, because it send 2 incredibly bad signals; 1. Not your keys not your assets (if the bridge can simply change where those assets are, they aren’t your assets, you have an IOU, and 2. risking your assets for their yield, no amount of yield should ever be worth double dipping user assets, (apologies for the shameless plug) one of the core tenets when we built the new Sonic bridge was specifically that we should never be able to do anything with the underlying assets (lessons learned from Multichain).

If the proposal would pass, it destroys all trust, so completely unlikely to pass, but it is concerning that it is even possible, which means one day, it could pass, or ultimately an attacker could make it pass. The best way to avoid an “unlikely event” is to turn it into an “impossible event”.

But the real reason I wanted to post here, is to illustrate the problem to people, and that problem starts with fractional reserve banking, very simply, T1 banks only need to keep 5% of deposits in physical cash, so you go to your bank, and deposit $10,000, that bank can then loan out 95% of those assets, so they loan $9,500 to your friend, who deposits it at the same bank (now the bank has on its balance sheet $19,500, even though it actually only has $500. Now it can lend out $9,025 to the next user and repeat ad infinitum. This wrapped leverage is essentially the problem with today’s banking system (and a core reason for a lot of financial collapses).

So tracking it back to defi, you deposit USD$1,000 into Stablecoin provider A, they issue you USDA$1,000. You deposit that USDA$1,000 into a bridge, the bridge issues you bUSDA$1,000, you deposit that into Aave to earn yield abUSDA$1,000. This is a 1:1 representation of the asset from start to finish. But not lets say A wants to make some yield with your cash deposits, so they buy some securities with your USD$1,000, now the bridge wants to make some money, so they deposit your USDA$1,000 into another money market on that blockchain. Now there exists $3,000 IOU from the original $1,000, anyone can see when those get called, you have a problem. This risk leveraging is essentially the problem that led to a majority of asset collapses, and in the long term, overly complex high yield, just means everything goes to 0.

Marc’s proposal shows the commitment to user asset safety and is a great signal, originally when Fantom got Aave governance to deploy on Fantom, Marc was the one that called out Multichain and pulled Aave (a move that protected all their users), because the risk spidey sense were correct, the fact that all the key holders weren’t disclosed is something I wish I challenged myself.

Overly long story, but no bridge should ever be able to even propose something like this, and just being able to do this, should be enough of a red flag.

23 Likes
7

We support this proposal given the extensive history of bridge vulnerabilities as critical attack vectors in DeFi. Our primary concern is the rehypothecation of USDC/USDT into yield-generating platforms and derivative tokens (including USTB by Superstate, sUSDS by MakerDAO/Sky, and stUSD by Angle Protocol), each introducing distinct risk profiles. The proposed changes would create additional risk layers for bridge asset holders on Polygon and Aave (where these assets serve as collateral), while the benefits primarily accrue to Polygon and service providers.

On-chain data demonstrates significant risk aversion among Polygon users, evidenced by the disparity between total stablecoin market cap of $1.6B and $1.2B TVL across all assets on Polygon - indicating many users are not comfortable or willing to deploy their stablecoins in DeFi projects. We believe users should have agency in deciding whether their tokens participate in DeFi strategies through an opt-in mechanism.

The current exposure of stablecoins on Polygon Aave v3 is substantial:

  • USDC collateral: 45.48M
  • USDT collateral: 52.55M
  • USDC.e collateral: 12.64M

In the event of an Ethereum-side exploit, bridged assets would depeg, creating bad debt across positions using stablecoin collateral. This scenario puts stAAVE, currently serving as a backstop, at risk. In the future, when the umbrella safety module is in place, depegging would put atoken holders at risk of slashing.

We believe there are potentially attractive methods to generate yield from idle bridged assets, and this concept deserves further exploration - however, in its current form it poses too much risk, especially considering the size of the bridge wallet and the non-opt-in nature of the system. Given Aave’s significant market position in the Polygon ecosystem with 38% of total TVL, we believe we have a responsibility as market leader to prioritize user safety. While we support taking action on these risks, we question whether a complete market offboarding is necessary versus specifically offboarding stablecoins - we will await risk providers’ analysis and recommendations before making a final decision.

9 Likes
8

nice post @0xkeyrock.eth, i would like to add that in reality, should a failure of the bridge occur, the damage would be much more widespread than just bad debt from users using stablecoin collateral. Users left with worthless deposits might start borrowing unaffected assets to offset their position for example, spreading the debt on other, theoretically healthier assets as well. We have seen this happening with harmony. Therefore this is an extremely serious matter to be evaluated carefully. I hope polygon DAO members will get proper explanation of the risks and better understanding of what could happen if something goes wrong, and the PIP gets reworked in a way that is more risk averse before moving forward.
On the wider topic of bridge assets rehypothecation (thanks @andrecronje for bringing it up) i don’t consider it necessarily a dealbreaker if done properly, but the PIP in question is lacking on many aspects.
As mentioned before, if Polygon moves forward with it, i do hope serious reevaluation of the strategy is carried out before the actual implementation, so that our.relationship can continue.

7 Likes
9

Hi, I’m the 13th largest delegate (very small) in POL governance.

I just want to say for the record, I don’t expect the polygon proposal to pass and I will be rounding up other delegates to oppose it over there.

My comments over there.

5 Likes
10

When bridges gamble with users’ assets, the promise of neutrality collapses into chaos. By definition, bridges serve as neutral infrastructure that enable the transfer of liquidity for a token from one blockchain to another. However, when lock-and-mint bridges attempt to invest the collateral on the originating chain into leveraged DeFi strategies, the bridged token on the destination chain no longer retains the same properties and economic guarantees as the original token on the source chain.

For fully fiat-backed stablecoins like USDC, redemption guarantees are upheld because issuers hold high-quality, liquid assets such as U.S. Treasury bills, along with deep liquidity and access to the banking system. If a bridge invests the collateral into lending protocols, the bridged asset on the new chain becomes fractionalized and loses its full fiat backing. This means users would perceive the bridged token as distinct from the original, and its market value would reflect the fractionalized and rehypothecated nature of its collateral. As a result, the bridged asset would lose fungibility with the original token.

The key characteristic of fully reserved fiat-backed stablecoins is the issuer’s commitment to holding high-quality, fully reserved assets. This commitment is enforced through regular audits and regulatory compliance in jurisdictions with stablecoin regulations. By limiting the issuer’s discretion in choosing collateral assets, the risks of principal-agent problems are avoided. The proposal to invest bridge collateral reintroduces the principal-agent risks that plague banking and centralized discretionary investment managers. Worse yet, unlike traditional finance, there is no central bank backstop to rescue the system in the event of a liquidity crisis. This makes such a program even riskier and more centralized than traditional banking as a single team would determine the risk profile of the collateral investment portfolio and liquidity on the destination chain. This would make a shaky ground for building future financial applications.

4 Likes
11

Just adding my voice here. Disaster of a proposal from polygon. Hopefully its rightfully shot down by all voters. I will be voting against. If it goes ahead it will signal there can be no trust for polygon users using the chain, their assets can be coopted at any time.

If the proposal goes ahead I will be forced to remove all assets to another competing chain. This is a direct consequence and non negotiable imho for all polygon users.

2 Likes
12

Summary

This analysis covers the details of Polygon’s proposed implementation of bridged assets and its risk profile. It will also cover past events that presented similar risk profiles.

We support adjusting risk parameters for Aave V2 and V3 deployments on Polygon, specifically for the affected stablecoin markets. This action aligns with Aave’s proactive risk management strategy, which mitigates exposure to increased risks stemming from external bridge vulnerabilities. This approach has precedent in Aave governance, with successful actions to mitigate similar risks on Fantom following the Harmony bridge exploit.

Motivation

The Polygon governance proposal seeks to utilize the ~$1.3 billion in stablecoin reserves held by the Polygon PoS Portal Bridge to gradually deploy into curated liquidity pools.

The proposal outlines a phased approach for deploying stablecoin reserves (DAI, USDC.e, and USDT) into specific yield-bearing vaults. These vaults, curated by Allez Labs, Morpho Association, and Yearn, will follow different yield strategies with each asset:

  • DAI: Deployed into Maker’s sUSDS, a canonical yield-bearing wrapper for the Maker ecosystem.
  • USDC and USDT: Deployed into Morpho Vaults, curated by Allez Labs, which act as the core yield source. The vaults will support lending against assets like USTB (Superstate), sUSDS (Maker), and stUSD (Angle).

We consider the governance proposal to substantially alter the risk dynamics for assets in Aave’s Polygon deployments. History has shown that bridge vulnerabilities can lead to catastrophic losses in DeFi, exemplified by major exploits, including Multichain and Harmony, which directly affected Aave in the past.

Additionally, such a proposal, if passed, sets a dangerous precedent for rehypothication at the bridge level and thus exposes the users and protocols to unmanageable risk.

Harmony and Fantom

The Harmony Horizon bridge exploit led to a $100M loss, significantly impacting Aave V3 Harmony. Exploited bridged assets, including DAI, USDC.e, USDT, and AAVE, saw price discrepancies, creating arbitrage opportunities where users collateralized depreciated assets to borrow unaffected ones (ONE and LINK). This disrupted the protocol’s health factor mechanics, as positions appeared healthy despite underlying asset devaluation. In response, the DAO halted borrowing to prevent further arbitrage and stabilize the pool, although Aave suffered from the creation of $750K of bad debt.

Subsequently to the Harmony Bridge exploit, Aave proposed freezing its V3 market on Fantom. This action aimed to mitigate risks associated with the network’s dependency on the Anyswap (Multichain) bridge, successfully preventing losses from the Multichain Hack of June 2023.

Economics

The fees accrued from Aave’s Polygon instances represent only 3.8% of the protocol’s total revenue, with 2% of that coming from Polygon V2, which is already in the process of being deprecated. This leaves the remaining revenue contribution from Polygon V3 at a mere 1.8%, a negligible amount compared to the significant additional risks posed by the proposed changes. Given this minimal revenue impact, it is not justifiable to expose the protocol and the Safety Module to the risk of this proposal.

Vaults risk

To properly determine the risks introduced by the new Polygon proposal, we cover the proposed deployment of Polygon PoS Bridge stablecoins into various yield-bearing vaults. Our analysis determined that introducing the yield-bearing vaults introduces significant risks to some of the assets, particularly due to the limited liquidity of the underlying assets and the highly aggressive parameters utilized.

DAI: Managed Exposure

DAI reserves would be allocated to Maker’s sUSDS, which offers atomic withdrawals. While this structure minimizes direct risk exposure, it relies on Maker’s governance and underlying stability.

USDC and USDT: Morpho Vault Risks

USDC and USDT reserves are slated for deposit into Morpho Vaults, targeting Superstate’s USTB, Maker’s sUSDS, and Angle’s USD. This allocation raises critical liquidity concerns:

  1. Superstate’s USTB

    USTB represents a tokenized fund tied to U.S. Treasury Bills, but its on-chain supply is alarmingly small, with only $117M in assets under management compared to the assets currently deposited in Polygon POS Bridge, which account for $1.3B.

  2. Angle’s stUSD

    Angle’s stUSD relies on USDa as its backing, with USDa hardcoded to $1 in its oracle. This dependency could propagate exploits in USDA to stUSD. Notably, Angle’s agEUR stablecoin suffered a substantial loss of backing during the Euler hack, raising doubts on the resilience of assets with a similar exposure to vast smart-contract risks. Furthermore, stUSD’s current market size on Morpho is just $1M, with a total USDa supply of $27M—far too small to handle the proposed inflows.

Morpho Architecture

A critical concern with the proposed use of Morpho vaults lies in the immutability of Morpho’s parameters, which prevents risk providers from rapidly adjusting key settings, such as the UOptimal and IR curve, in response to market changes. In addition, Morpho utilizes a set of hardcoded parameters such as 90% UOptimal and a conditional time-based interest rate mechanism, which severely limits the availability of withdrawn liquidity and adaptability in the case of significant bridge outflow.

Given this architecture, Aave cannot dynamically manage risks as conditions change, leaving the protocol reliant on a third party’s fixed parameterization. Furthermore, the lack of clarity around the total exposure of assets within Morpho adds an additional layer of risk.

Recommendation

We recommend setting the LTV to 0% only for the affected assets of DAI, USDC.e, and USDT. This approach addresses the heightened risk that, in the event of a loss of funds, the affected stablecoins could trade below their oracle-reported value, enabling them to be used as collateral to borrow other assets for more than their real worth. Additionally, we will recommend gradually reducing the LT for these assets to 0 in the future in order to offboard any utilization as collateral. While this is a rare occurrence, given the affected assets are primarily stablecoins, there is currently $18.7M worth of debt against them in the Polygon V3 instance.

However, to avoid immediate and drastic outflows that could also lead to illiquidity risks and rate volatility risks, we recommend against setting the Reserve Factor to 85% and, instead, limiting the increase to 25% initially and only for USDT. This approach provides an immediate response while allowing for monitoring of the market dynamics. If the proposal proceeds, further increases in the Reserve Factor should be implemented gradually to minimize disruptions, ideally in combination with alternative parameter changes like adjusting Slope 1 or Slope 2 based on the asset specifics.

Finally, we strongly support removing Aave V3 Polygon from the Safety Module and canceling the umbrella deployment on Polygon.

Specification

Deployment Asset Current LTV Proposed LTV Current RF Proposed RF
Polygon V3 DAI 63% 0% 25% -
Polygon V3 USDC.e 75% 0% 50% -
Polygon V3 USDT 75% 0% 10% 25%
Polygon V2 USDC.e 75% 0% 99.9% -
Polygon V2 DAI 63% 0% 99.9% -

Disclaimer

Chaos Labs has not been compensated by any third party for publishing this ARFC.

Copyright

Copyright and related rights waived via CC0

5 Likes
13

It isn’t discussed here how much of that $70M generated yield would flow back to Aave, given it is the largest DeFi application in the Polygon ecosystem. Maybe half? $35M a year? Does that change the economics?

Tangentially, there’s some odd financial theory here that deserves to be discussed.

The above three points are kinda nuts.

USDT does fractional banking and has the most PMF in crypto after Bitcoin. DAI does fractional reserve banking. Hell, even Aave does not keep 100% of assets on hand. If everyone tried to redeem their aUSDC, there wouldn’t be enough on hand to fulfill the requests, as the entire point is that these assets are lent out.

“Fractional reserve banking” is marketing speak to create a boogeyman out of maturity transformation, a fundamental and perhaps axiomatic finance function. If DeFi cannot bring credit expansion on chain it’ll be a mostly useless and relegated piece of technology.

It isn’t what caused the GFC of 2008. Andre is not even wrong.

Isn’t Dai itself an asset vulnerable to those risks? What is unique about the extra risk taken on by staking?

Short-term treasury bills are the most liquid market in the world—orders of magnitude more liquid than any onchain asset. How much of them exist on chain is irrelevant, significantly less so than Superstate’s ability to scale their redemption capabilities. I imagine they can, given that short-term t-bills are the most liquid market in the world.

Other comments seem fair. Given Aave’s role in their ecosystem, one wonders if there is some way to make the Polygon proposal more accretive to Aave in the first order to create economics that makes the risk worth it. Thus translating an otherwise a cool but contested proposal into a mutually beneficial one.

3 Likes
14

I want to structure my feedback in 2 parts: regarding Aave itself and its users, and regarding the proposal this thread is a reaction to.


Regarding Aave and its users on Polygon:

  • I think any protection measure on Aave v3 Polygon should be executed in an ordered and non-invasive manner. Especially given the pre-PIP nature on the Polygon side (with the proposal still not approved, for my understanding), this Aave proposal should be a TEMP CHECK for signaling further steps, more than an ARFC.
    That means that I would not rush any type of LTV0 or parameters change until the pre-PIP gets confirmed.
  • Strongly FOR not supporting re-hypothecation of this style, at this scale. Additionally, the community should evaluate all other networks (e.g. GnosisChain) to hold everybody to similar standards, potentially defining what is acceptable, and what is not. For example, it is not the same the usage of assets in venues of the issuer (e.g. sUSDS), than on third-party systems.
  • If the PIP goes forward on current terms, Safety Module coverage of Aave v3 Polygon in my opinion should be kept while users choose to stay on the pool. Users of Aave on Polygon should have no negative consequence at all of the decisions they are not participating in. What users of Aave should be aware of is actually the entities involved in this proposal, and how they are basically “selling” them indirectly.
  • More on the PIP feedback side, but also full support on ACI presenting a strong stand on the matter. Being the “aggressive” entity opening this conversation is a very difficult spot to be in, and the Aave community and DeFi in general should respect this approach, no matter if from time to time is partially or wrong. The benefit is enormous.

Regarding the PIP (Polygon Improvement Proposal):

  • It would be for me a big surprise if the proposal really passes for multiple reasons.

    First, it is just surrealist for the Polygon bridge to become some type of asset management venue, no matter which tech is used, delegation to professional parties, or anything else. If people bridging assets wanted to invest them there is something called DeFi on Polygon, with multiple options of all types and shapes, not only Aave obviously. Best scenario, what this proposal does is invest funds of precisely entities that simply don’t want to; worst scenario, it re-invests the assets already invested in Polygon itself, or opens the possibility for it.
    Second, maybe it is that Polygon changed from what I knew, but going in this direction seems totally out of the blue and inconsistent with the network image: innovation on the blockchain base layer (doing big bets on experimental technology like validity-proofs early on, top-notch message bridging system when all other networks had close to nothing, etc), focus on growing different types of ecosystems like DeFi, games, social, etc.

  • A proposal as such involving so many entities doubt it reached the forum without some type of support from the Polygon community. This is actually the most concerning aspect, simply pointing out that there are multiple incentives given behind the scenes, consequently having other priorities than doing what is right.

  • It is interesting to see how the “curator” word is spreading across DeFi, in combination with “risk manager”, in this case at the same time. Some pointers from my side regarding the new glossary:

    • “curator”: third-party asset manager, optimizing for growth because if not, they don’t have any reason to exist. They take the fee, or extract tokens from whoever they work to, in this case, assuming they take a fee of assets under management, or tokens from whoever subsidizes the whole thing. Guessing Morpho, because nobody else has any reason for doing that, and seems that is the typical approach on their side.
    • “risk manager”: ideally, a responsible third party with a collaborative but still a bit adversarial mindset towards the growth of the system they are risk manager of. In addition, helping a body of decision-making (e.g. a DAO in the case of Aave) to make more informed decisions. E.g. Chaos Labs or LlamaRisk acting as the “bad guys” on Aave, fairly frequently opposing growth.

    When both “curator” and “risk manager” are exactly the same third party like in this case with Allez Labs, well, each one can draw his conclusions of the type of charade.

  • Respect is bi-directional: Aave should have been the first entity to be notified in this public forum about any type of intention to allocate funds for the bridge anywhere, because 1) Aave is like 40% of the TVL of Polygon, and in the same or even higher levels for the last 5 years; 2) Polygon is actually kind of a “privileged” network from the Aave side, for example the voting of Aave Governance itself happens there 3) stkAAVE holders are currently covering Aave v3 Polygon.

    It doesn’t really matter if there have been any type of private conversations between stakeholders behind the scenes: Aave is actually a real DAO, and things should be communicated in this forum when going in any precise direction like this. E.g. if the same proposal involved supplying assets on Aave, I would have opposed it, the same as the current one supplying somewhere else.

7 Likes
15

No comment on the motivation or whether it’s a good or bad idea to do this. But one ask is the timeline. If this does pass, it does affect Toros and dHEDGE, we’d have to shut down our Aave based products on Polygon. That said, Polygon represents our smallest chain in terms of capital. Could decision on this be postponed until January? Preferably at least mid-January.

Our team will be off for the rest of the year, so I’m hoping this change does not happen this month, so we have time in January to assess and execute any needed changes for our products.

16

Generally supportive.

Just concerned about solution for current loans on polygon market. What is thr impact and can the loans and positions be seamlessly transferred to another L2 market?

17

If it passes (if because maybe not needed) you simply close your loan.
Third party applications may help moving that loan to another chain or we think about a potential solution. Again, if needed.

18

You mean if that Polygon community pre-PiP proposal passes, Aave will proceed with this governance proposal to freeze Polygon markets on Aave?

Alternatively, if that Polygon pre-PiP proposal does NOT pass, Aave will not change Polygon markets on Aave?

I just want to know if users should start moving their loans elsewhere or to other chains, I don’t want to be the last one…

I certainly don’t want to wake up one day & find a markets frozen on Aave, then go on a goose chase on Twitter to find some mention about some Aave proposal that already passed & froze some markets. (Yes, that happened last year)

1 Like
19

Hopefully it doesnt pass and polygon get a wakeup call that just asking questions and thinking about hypotheticals to see how the market reacts is incredibly bad and poor optics for their chain and just stop doing it. Trust is easily lost and hard won. Dont throw away what you built over something stupid.

This is what they were doing by the way:
“A pre-PIP is exactly what it sounds like: an early proposal to get feedback and gauge sentiment from the community.”

Maybe dont experiment to see how markets react. Because it can react negatively.

20

Frozen markets dont’ affect users positions in any way. users ability to repay their loans and withdraw their positions remains untouched. This is different from market pauses, which happened last year. Pausing is a much drastical measure only enacted in case of impending risk, this is not the case.

2 Likes